Quote from: InterArmaEnimSil on July 16, 2010, 02:59:34 AM

So how come there has been no such inflation in gold in the hundreds of years it has been used as a currency in fractional reserve banking?

I see the issue now! There's a disconnect between what we're discussing. Let me try to be more clear.

Today's standard is fractional *in relation to the promises to pay that you (a bank) have on-hand, in deposit dollars.* So, say you get five real dollars on hand, printed. You then lend out fifty dollars because you have a 1/10 backing requirement. Someone deposits those fifty dollars, and now you (the banking system, not necessarily the same company) have fifty-five dollars in backing! Of course, you really only have the five dollars in paper money, but all that is required to make loans is that you have deposits, even if they're deposits of fictitious, un-backed money. Now with fifty-five dollars on hand, you lend out another five hundred fifty dollars. Someone deposits these into the banking system, and now five thousand five hundred dollars of loans can be made, and so on and so on, inflating the economy. If you want to lend more, you just lend a little, then someone deposits that non-dollar-backed, fictitious debt money, that doesn't even exist in paper form, in *any* bank, then that bank can lend back even *more* money (than the money just fictitiously created) in loans. Its all a cycle of fictitious dollars based on nothing but people's signatures on mortgage documents. All you have to have on hand to back your loans are...loans. Since you can make loans out of nothing, you can make all the loans you can imagine with no problem, with no backing. All the while, you just need enough paper to cover a day's requests - not any percentage of the loans you actually make.

The gold standard was fractional in proportion to the number of pounds of gold you had on hand. So, you could maybe lend out ten-gold-pounds worth of loans if you had one gold pound on-hand, but it stopped there. There could be more money lent than gold on-hand because it was fractional, yes, but because it was based in gold and not debt, you couldn't just continue the cycle ad-infinitum. Loans themselves could not form the basis of new loans. In contrast, today, the basis of a new loan is nothing but another, older (sometimes only seconds older) loan.

Thus, I think I've found the disconnect between what I'm talking about and what everyone else on here is talking about. I'm talking about fractional reserve banking where your reserve is just more debt - that's the current system. You guys, I think, are talking about fractional reserve where the reserve is something solid - something that requires work to mine. Bitcoins count for that.

However, you're advocating going to the *bitcoin standard.* Ie, if someone wants to make X-BTC in loans, they must have .10X-BTC in actual coins on-hand.

The forum and the central bitcoin website seem both to believe that converting to a bitcoin-denominated economy will create a bitcoin-standard economy. This is not true. Backing your money with bitcoins is a *huge* step beyond simply using bitcoins as the denominating money.

People can decide for themselves what currency to use, and I like bitcoins, and hope that the currency takes off, I really do. However, even a bitcoin-denominated economy would still be a *debt-standard* economy. Banks would see that people were using bitcoins, and they would go, "Ooh, we can make money offering services in bitcoins instead of dollars." However, the law would remain that even though loans were made in amounts expressed in bitcoins, those loans had the backing of other loans, not actual bitcoins.

To get bitcoins used as currency, you just need adoption. We're getting that, and that's great. However, what do you need to eliminate the debt-standard and ensure that all loans created are *backed* with real bitcoins?

A government decree. A law from Congress or Parliament that declared that loans had to be based in bitcoins, not debt. GLHF. Besides, even if we got that, it would eliminate inflation, but it would make bitcoins just another government-controlled, monopolized currency. That would kill at least half of the point, right?